Reappraisal of Pension Funds

Reappraisal of Pension Funds Reappraisal of Pension Funds

I n recent years it is often reported that Iran’s shifting demographics have resulted in a pattern of lower ratio of workers per retiree. Contributing factors include increased life expectancy  due to improvement in healthcare and declining fertility rates. The systemic reduction in worker to pensioners’ ratio could likely, in the coming years, lead to crisis for the pension funds as has been the case in many countries, including the developed world.

The scale and scope of the dilemma has long been a subject of debate in Tehran’s socioeconomic circles and policymakers as social scientists approach the issue from different angles and try to find workable solutions.

The Civil Servants Pension Fund (CSPF), an arm of the ministry of cooperatives, labor and social affairs, is responsible for the affairs related to the retirement of civil servants. Pension funds in Iran are based on Pay-As-You-Go (PAYG) system. In this system, the pension fund relies on each fiscal year’s earnings to balance the payments; therefore it is understandably sensitive to the ratio of workers to retirees.

 Maintaining Ratio

Financial expert Hassan Khoshpour says the worker to retiree ratio must be maintained in a way as to provide the social security organizations with substantial capital to invest in different sectors. On the other hand, “economic stability and a business-friendly environ is crucial for investments and profits thereof.”

Even though the government provides some financial assistance to the pension funds, the Social Security Organization (SSO) is an independent body and “pensions must ideally be paid from the monthly share of insurance premium paid by workers/employees to the SSO” and not from investment returns (profits) or government resources, he says.

According to this observer, the demographic problem which causes low worker to pensioner ratio in Iran should be addressed in tandem with measures to boost the economy because even the most advanced economies are often at a loss when it comes to solving grave pension issues with a contracting population pyramid. Some of the problems posed by low worker to pensioner ratio include depleting resources in the pension funds thereby limiting investment opportunities and increase in costs related to retirements.

 Dependency Declines

Esmael Gorjipour, another expert, says dependency ratio (ratio of total number of insured people to pensioners) declined from 24 in 1976 to only 6.4 in 2013. This means there are “only about 6 insurance premium payers versus each retiree.” Therefore the reliance of pension funds in government budgets has jumped to as high as 75% in recent years. He cited early retirement policies (with five-year grace), decline in the number of government jobs and the pattern of tax evasion as some of the key factors that add to the “increasing gap between the input and output of the pension funds.”

Increasing number of social scientists have called for a shift from defined benefit to defined contribution pension type as a solution.  The pension funds in Iran are currently based on the ‘defined benefit system’ wherein a fixed  amount is paid to the pensioners irrespective of the actual profitability of the funds, while in the ‘defined contribution system’ share of premiums and benefits increase with the rate of inflation. They opine that the shift would help curb overreliance on the demographic profile and dampen the effects of inflation.